Monday, June 25, 2012

Executive Compensation - The Government Loses Again

The next time the Government challenges your compensation levels, you have two new ASBCA decisions (one this month and the other from January) that call into question their methodologies for determining "reasonableness", and these cases may help in your defense.

The ASBCA (Armed Services Board of Contract Appeals) handed down a decision earlier this month that again, calls into question the Government's (and specifically DCAA's) methodology for evaluating the reasonableness of contractor employee compensation. This particular decision involving a Washington DC area contractor, Metron, Inc., follows the J.F. Taylor decision from January of this year which we blogged about here and here.

Compensation charged to Government contracts must be reasonable for the work performed. FAR 31.205-6.(b)(2) provides some factors that may be relevant in determining reasonableness. These include conformity with the compensation practices of other firms;

  1. Of the same size
  2. In the same industry
  3. In the same geographic area, and
  4. Engaged in similar non-Government work under comparable circumstances.
In order to make such a comparison, contractors and the Government rely on commercially available surveys. There are a number of these surveys, both national and regional in scope. The national surveys include:

  • Radford
  • Watson Wyatt
  • Economic Research Institute

The Washington Technical Professional Forum Compensation Survey Report would be an example of a regional survey for technology companies in the Washington DC area.

In the Metron case the contractor based the reasonableness of compensation on the Radford survey. The Government countered using averages of a number of surveys which produced lower numbers.

The Board was persuaded by Metron's methodology for determining reasonableness. 

Based on the entire record, we conclude that Metron has sustained its burden of proving that the ... executive compensation costs in dispute were reasonable....After analyzing available surveys, Metron concluded that the Radford Survey best matched the company, among other things, in terms of size/revenue ... industry ... and geographic location.

The Board also fully considered the Government's contentions regarding the use of additional surveys to "average" in determining reasonableness. However, it determined that on the facts of this case the Radford Survey data alone provides a sufficient foundation for proving the reasonableness of Metron's executive compensation. The additional surveys relied upon by the Government were less appropriate, comprehensive, reliable, or persuasive than the Radford Survey for the positions in dispute.

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